Readers Respond on Greece

A lot of interesting commentary on my piece on Greek austerity.  Commenter eSGee says that people kid themselves in a crisis:

It seems like people want to believe there's a solution.  Sometimes there's not a solution, just a series of bad choices.  Austerity involves pain, no doubt.  But there are no options that dont' involve pain. The argument shouldn't be look at the negative effects of austerity but rather  how those negative effects compare against the negative effects of other approaches.

That is the proxy for what's happening in the US.

And to people who seem to think that default is a way better option than raising one dollar of tax revenue.

aka_Scoop asks a good question:

Here's my question: Why are the Greek people so utterly unwilling to accept that the government can no longer spend much more than they're collectively willing to pay in taxes because creditors are rapidly becoming unwilling to lend to them?

This is simplicity itself but there's no indication that a single person in Greece understands it. These folks aren't rioting about who bears the brunt of tax increases and spending cuts they know to be necessary. They're rioting for an impossibility, the status quo, which is like rioting for a unicorn in every Greek house.

tab3 attempts an answer:

I have a Greek friend who has lived in Greece his whole life (aside from college). He told me that the politicians have been directing money to their own pockets and those of their friends for quite some time. He also told me that businesses rarely pay much in taxes because they hide their earnings. Regular people cannot do this as well as those with more means.

I think much of the outrage boils down to this: "the people who have been stealing our money for many years now tell us they have stolen all the money and we have to face austerity cuts". I would suspect the preferred solution is to make the people stealing money give it back, possibly through taxes directed at wealthier people. (Note, I use the term "stealing" loosely here.)
But bronxcobra says:

But, isn't that like Americans thinking 1/4 of the budget is foreign aid? Isn't the actual problem that the Greek public voted themselves benefits they simply weren't willing to pay for? As an example, groups as different as hair dressers, news anchors and wind instrument players are allowed to retire, with a full pension, at 50 because their jobs are considered dangerous.
People are really bad at assessing relative costs like this.  Say there are 100 legislators who have managed to divert €1,000,000 each from the public coffers.  That's a lot of money!  But they cost the government less than 2 million people who are each getting €100 euros. You saw this with the debate over the Bush tax cuts--Democrats pretty successfully managed to imply that the tax cuts for the wealthy were more expensive because rich people got a much larger absolute cut than the folks making $60,000 a year.  But there are only a very few rich people, and a whole lot of people making $60,000 a year, so the tax cuts for people who earned less than $250,000 cost three times what we spent on tax cuts for the affluent.

Corruption at the top is expensive, wrong, economically distortionary, and and civilly corrosive, and should of course be stopped. But most people overestimate how far this will go to close a budget gap.  My understanding is that even the legendarily corrupt Tammany Hall funneled most of its diverted funds to buying political support from their base (aka giving stuff to constituents), not personal enrichment.  But of course a million dollar bank account is a lot more eye-popping than a million Christmas turkeys.

Publius the Lesser muses:

As Garth Wood mentioned, it's not just the Greek people who don't understand Greece's fiscal situation. Most people are "rationally ignorant" about many topics, including politics and finance, because these topics usually don't affect their day-to-day lives and they have little chance of affecting the outcome in one of these areas. So irrational beliefs about the government's capacity to provide accustomed benefits at the accustomed costs persist, but are generally harmless to the individual, because these beliefs don't affect their day-to-day decision making.

The problem comes when circumstances change - either gradually or all at once - and force a sharp change in government policy whose effects the person on the street understands (fewer benefits, higher taxes or both) but whose cause he or she does not. They try to fit things into their existing mental framework and come up with explanations like "the politicians don't want to default because they're buddy-buddy with the Evil Bankers(tm)" or "the Germans should forgive our debt because we forgave theirs after WWII." Explanations don't help because many of the people involved don't have the necessary background knowledge to understand the explanation completely, and because the explanation often produces more stress ("We've been living beyond our means for decades, and so our generation will retire later and experience lower living standards to pay for the lavish retirements and benefits paid to past generations") on top of the stress they are already experiencing from the crisis itself, while their irrational explanations ("Evil Bankers(tm); Stupid Germans!") relieve that stress. So the irrational beliefs persist, even though they have become harmful.

Crises like the Greek fiscal crisis call for leaders to do the right thing in the face of popular opposition and hope that things hold together long enough for more rational beliefs to take hold. The problem, of course, is that leaders often don't know what the "right thing" is and are subject to the same sorts of distortions that their constituents are (if not always in the same direction), so they won't necessarily make the best decision for their nation.

Tracy W is hearing a lot of anger:

It's striking the number of people I've heard compare the IMF/World Bank demanding reforms before lending to mafia threatening to burn down businesses if they're not paid protection money, missing that any country is free to tell the IMF or World Bank to sock it, the only reason that the IMF and World Bank have power is that the country in question typically wants to keep on borrowing.

(Same applies to the ECB and other European-specific institutions, but I haven't heard anyone specifically comparing them to the mafia yet).

The other thing I hear about Greece is a few arguments that the Germans are obliged to bail the Greeks out, because of debt forgiveness given to the Germans after WWII.
Jay wants to know why the Greeks should bother to leave the euro if they're going to default anyway:

My own belief is that Greece should exit the euro, and redenominate its debt in drachmae, which would constitute a de-facto default
In what way does changing currencies help? I mean, you're already defaulting.
Is the idea that you'll be able to inflate away future debts more easily? Who would buy 
Greek debt knowing that the only reason they are issued in Drachma instead of Euro is specifically because the Greeks intend to inflate it away?
Isn't this just the difference between nominal and real interest rates?
The short answer is that leaving the euro solves multiple problems.  It allows them to inflate away part of an unsustainable debt burden, yes, but it also relieves the pressures that have been exerted on Greece by sharing a currency with very different economies.

Greece has three major industries: tourism, agriculture, and (sort of) shipping.  While the adoption of the euro may have made tourism more attractive to Europeans, it made it less attractive to everyone else, because traveling in Greece became more expensive; it also made their agricultural exports less competitive.  Meanwhile, the monetary policy that was appropriate for the large nations at the center was wildly inappropriate for the periphery.

I am not knocking the benefits of a sound currency.  But these benefits are not so great as to dominate other considerations, and more importantly, what we are increasingly learning about currency pegs is that they cannot work without complementary institutional development.  Joining the euro let Greece temporarily borrow Germany's credit rating, but not the institutions that gave Germany it's credit rating. The result is, well, as you see.

Commenter Hu weighs in for the anarchists:

Believe it or not, the Greek people understand their situation better than Panandreo, IMF economists or the people posting here. Here is what the Greeks want:

- default on the debt

- crack down on tax evaders, especially wealthy tax evaders. Use the proceeds from the tax crackdown to avoid austerity cuts.

That's not really so complicated, is it? As the article says, Greece is only running a 5% primary deficit. If Greece were simply to repudiate its debt, it would only need to cover a 5% deficit with increased taxes on the rich. That is the socialist solution to the problem, and the Greeks want the socialist solution to the problem, which is why they elected the "Socialist" party, but the party is not performing the will of the majority, which is why there is rioting.

This is literally a fascist takeover of Greece by foreign banks and a coup against representative government in Greece. The Greeks, however, can default no matter what Panandreo does - no interest is going to be paid on anything as long a Greece is paralyzed by protests and strikes.

I'll leave aside the apparent confusion about the meanings of the words "literally", "Fascist", and "coup".   As I wrote to someone else yesterday, this is like the Underpants Gnome theory of financial crisis resolution:

  1. Default
  2. ???
  3. Crack down on tax evasion!
Defaulting does not, so far as I can see, make it easier to collect taxes from the rich--indeed, insofar as they own those bonds, or shares in the banks that will be severely hurt when those bonds are not paid, or businesses that will be hurt by the resulting financial crisis, it makes you less able to collect taxes from the rich.  Cracking down on tax evasion would be a very good thing to do.  But it is a very good thing to do whether or not Greece defaults, and it will not be done instantly.

Commenter dmcgregor writes:

But the tax evasion is not uniformly distributed. According to estimates from a paper (Distributional Implications of Tax Evasion in Greece, Matsaganis and Flevotomou) I read salaried employees are estimated to only under report their income by -0.6%, while farmers are around 53% and other self-employed 25% (which of course makes sense, much more room for underreporting in those areas)...but also importantly, the under reporting is strongest at the bottom and top of the income scale. So a middle class government worker who has by and large paid the taxes owed, is the one suffering because the rich can get away with under reporting their income significantly? I know life isn't fair and all, but that seems worthy of getting a little pissed off about.
Sure, but who do you think is taking the bribes to let the rich people and the farmers out of their taxes?  That's right, salaried civil servants (who I guarantee are not paying taxes on their bribery income.)  The wealthy, the poor, and the self-employed have the most scope for jiggering their income statistics, but you won't solve tax evasion without pretty radical changes to the way that Greece's civil service operates. Changes that the civil service has vigorously and effectively resisted at every level. Or so I understand it.